The biggest hedge fund shorts during February struck a sour note with portfolio managers as many found themselves squeezed right out of some of their top short positions. In fact, the fourth quarter 13F filings with the Securities and Exchange Commission indicate that hedge funds slashed their short positions by the biggest percentage in more than four years. This provides proof that what we witnessed in February was indeed a short squeeze, despite some firms’ determination to deny it.
In fact, the fourth quarter 13F filings with the Securities and Exchange Commission indicate that hedge funds slashed their short positions by the biggest percentage in more than four years.
Hedge fund shorts sliced
Bank of America Merrill Lynch analysts Jue Xiong and Stephen Suttmeier said in a report dated March 11 that hedge funds slashed their notional short positions 4.3%, which they found to be the highest percentage decline since the third quarter of 2011. Overall, they upped their net exposure from 69% to 73%, although excluding shorts in exchange-traded funds, net exposure climbed from 59% in the third quarter to 64% in the fourth. Net shorts in ETFs were slashed 4.8% to o$124 billion, marking the first decline in a year.
[drizzle]Notional net exposure to the U.S. dollar climbed to $741 billion, a 6.9% increase, said the BAML team, while cash holdings declined to 3.5%, coming up short of the 4.4% five-year average.
Meanwhile hedge funds kept their gross exposure at $1.85 trillion for the fourth quarter. Long exposure edged one percentage point higher to 128%, and short exposure declined from 58% to 54%.
Including positions in ETFs, gross exposure was 197%, which Xiong and Suttmeier said is the lowest level in more than two years.
Hedge funds favor Tech
The BAML team reports that hedge funds increased their weighting in three of the ten sectors during the fourth quarter: Technology, Financials and Utilities. This marked a significant shift as Tech became hedge funds’ favorite sector after Consumer Discretionary was the favorite in the third quarter. The fourth quarter was the first time Tech was hedge funds’ favorite sector since the third quarter of 2012.
Interestingly, hedge funds cut their weighting in Consumer Discretionary the most as they dumped Multiline Retail and Textiles, bringing the sector’s weighting to its lowest level since the end of 2011. Energy was still the least favorite of hedge funds as it has been since the second quarter of 2010.
Top 100 hedge fund shorts feel the squeeze
The BAML team also found some interesting trends with the largest hedge fund shorts. According to Xiong and Suttmeier, the top 100 hedge fund shorts were squeezed higher 4.59% last month and outperformed the top 100 hedge fund longs by the biggest margin since they started keeping records in 2011.
And it wasn’t just the favorite hedge fund shorts that caused so many funds to perform so poorly recently. The BAML team said mega-funds’ 20 core holdings underperformed the S&P 500 total return index 1.53% in January, marking the worst monthly underperformance since November 2014.
They add that the Hedge Fund General Index was down 5.46% through the end of last month, which was on par with the S&P 500’s decline.
The BAML team computed the top hedge fund shorts and longs “by mechanically ranking net hedge fund ownership in dollar notional.”